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NIO Stock Will Trend Lower Until the Company Can Get Profitable

Nio stock still reflects a lot of investor euphoria, not real profit forecasts

Nio (NASDAQ:NIO), the Chinese electric vehicle (EV) maker, is likely to trend lower until the company can show profits. Nio stock now has a market capitalization of $14 billion. That market cap is almost unbelievable.

a sports car made by Nio
Source: Carrie Fereday /

For example, its latest for Q1 report shows that Nio makes 7.4% negative margins on its vehicles. It also produced a negative 12.2% gross margin.

The recent gains in its market cap may not be sustainable until the company can lift its profitability.

Recent Nio Stock Gains May Wilt

The stock seems to have moved up is because it announced on July 2 that its EV car deliveries had increased. NIO delivered 3,740 vehicles in June 2020, representing a strong 179.1% growth year-over-year.

However, compared to 3,436 EVs delivered in May, the sequential increase was just 8.8% more in June. Moreover, with 3,155 EVs delivered in April, the June delivery gain was 18.5% over April.

But, so far, it is not clear if the company is making any money. In fact, in Nio’s latest press release for Q2 deliveries, it did not even state whether the gross margin or vehicle margins have stopped being negative.

The best that CFO Steven Fent, could muster was: “We are confident that our goals on gross margin and operational efficiency will be achieved.”

In other words, the company has not yet reached a critical point in production and deliveries where economies of scale kick in. Lower costs per vehicle only fall with higher production. The company has not yet stated what its gross margin and operational efficiency goals are or when they will be met.

Analyst Comments on Nio

Goldman Sachs analyst Fei Fang downgraded Nio stock on Friday, July 17, to a “sell” rating. He said the price target for the stock is $7 per share. It was no surprise that the stock tumbled after that.

The analyst said there was too much optimism in the stock price. The increase in market cap was not “accompanied by significant increases for volume and profit forecasts.”

According to Business Insider, the Goldman Sachs report was not all negative. For example, the report said that Nio will likely have enough cash to operate for the next two years.

Moreover, the Goldman Sachs analyst said that revenue will skyrocket over the next several years. He said revenues can grow by 80% in 2020, 86% in 2021, and 72% in 2022. But the analyst said Nio needed to accelerate its product launches and its product line-up. The analyst also said the government needed to expand incentives to buy EVs.

However, another analyst, Lei Wang of a Chinese investment banking firm named CICC (China Int’l Capital Corp.), says the stock is worth $13.50. But Barron’s argued that this does not matter much since most analysts on the stock do not presently rate it a “buy.”

Nio will not report its Q2 revenues and earnings until mid-August or so. Therefore, there is no way to judge whether the higher production and deliveries are moving the company closer to profitability.

What to Do With Nio Stock

Competition for EVs in China is rising. Tesla is expanding its production base there. In addition, other competitors are close to matching Nio’s production.

For example, on July 26, Barron’s reported that another Chinese EV maker, Li Auto is going public soon with an IPO of its ADRs. The symbol for the ADRs on NASDAQ will be “LI.” Li Auto makes electric SUVs and has delivered about 10,400 SUVs in Q2. This is roughly similar to the 10,331 EVs that Nio delivered in the past three months to June 30.

Therefore, the issue with Nio is whether you are willing to wait until the company is profitable or even has a chance of being profitable. As I emphasized above, the company is still making negative margins on every car it delivers. That cannot continue indefinitely.

It’s either grow or go bust with this company. That is the definition of a speculative play. If you have money set aside to gamble, Nio stock might be one of those you can throw the dice with. Just don’t necessarily expect to see any returns without a good deal of risk of loss as well.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

Article printed from InvestorPlace Media,

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